WHEN IT COMES TO stretching your budget, working a side hustle or part-time gig is an effective way to ensure you're earning enough to cover your expenses. But here's the rub: Your side business carries repercussions for your taxes.
"People who have been doing side gigs usually owe [taxes] and are surprised and shocked that they owe," says Nayo Carter-Gray, an enrolled agent at 1st Step Accounting in Baltimore. Freelancers should prepare for the very real tax results of essentially running a side business, she says. "I tell my gig workers to consider themselves mini-franchise owners," Carter-Gray says.
If you're accustomed to punching in as a traditional employee, you may need to start thinking like a self-employed small business owner, depending on your side hustle, experts say. For example, workers for the ride-hailing services Uber and Lyft or errand-running site TaskRabbit are considered independent contractors. That means taxes are not automatically withheld from their paychecks, and they'll need to pay income tax and self-employment tax each year while tracking and deducting qualified business expenses and potentially making quarterly tax payments. Failing to do so could land those gig workers with an unexpectedly high year-end tax bill.
If you're dabbling in the world of side hustles, here's what to know about the tax-filingconsequences so they don't catch you off guard.
[See: Answers to 7 Burning Tax Questions.]
Budget for what you'll owe the IRS. When you work as a traditional employee, your boss handles income-reporting and tax-withholding for you. This typically reduces what you owe at tax time (if you owe anything at all) since taxes are withheld from your paycheck. Because it's all taken care of, you don't usually have to worry about logging your income independently or paying quarterly taxes.
The situation is not as simple when you're selling your skills through a side hustle. If you're working as an independent contractor, freelancer or self-employed part-time business owner, you'll be responsible for tracking and reporting the money coming in and potentially paying taxes each quarter and in the right amounts.